Ukraine loses out on Black Sea’s rich natural gas supply

Talks about exploiting the Black Sea shelf have been ongoing since 2012 when estimates revealed that Ukraine’s deep territorial waters may contain more than 2 trillion cubic meters of gas.

Shortly thereafter, Russia stole most of Ukraine’s offshore oil and gas deposits when it annexed Crimea in 2014, extending its control into Ukrainian territorial waters.

As a result, Ukraine lags behind other Black Sea nations in extracting its potentially prolific offshore gas deposits.

It is simply unable to pull off such an ambitious project on its own. It needs billions of dollars in investments and more advanced technology to exploit its own seabed.

While Ukraine’s state-owned gas company Naftogaz has plans to start exploring Black Sea’s deepwater, it may be too little, too late, according to Ilya Ponomarev, CEO of U.S. company Trident, which is involved in this sector.

“The question isn’t ‘When will it start? It’s `Will it start or not?” he told the Kyiv Post.

Looking for partners

The urgency is growing to explore new gas fields, as Ukraine’s existing production sites are more than 80% depleted.

Naftogaz announced on May 20 it would finally start a 3D seismic exploration program in its seabed next summer to get a clear idea of its potential resources and how to exploit them.

Drilling in the Black Sea is a lucrative operation, but it requires stable financing and a flexible business model, which Naftogaz doesn’t have, Ponomarev said.

In total, it would cost at least $1 billion to explore the seabed and install platforms and gas wells. Naftogaz would need to put at least $200 million on the table to start the exploration.

But the company lost $684 million in 2020, leading to the firing of former CEO Andriy Kobolyev and the appointment of his replacement, Yuriy Vitrenko.

“Right now Naftogaz doesn’t have the capability to develop the exploitation, that’s why Ukraine needs partners,” Ponomarev said.

According to him, Naftogaz is too slow to take the lead as the sole offshore entrepreneur and too small to buy the equipment to make the most of the Black Sea resources.

This is why Naftogaz announced a partnership on March 15 with Israel-based company Naphta Israel Petroleum, which specializes in oil and gas exploration.

“Attracting international investors is crucial to achieving gas independence for Ukraine,” Otto Waterlander, chief operation officer at Naftogaz, said during the signing ceremony.

In February, Naftogaz also signed a similar mutual offshore cooperation pact with the Romanian branch of Austria’s OMV Petrom, the largest energy company in Central Europe with its own ambitions to become a major Black Sea player.

But OMV is one of the shareholders of Russia’s Gazprom in the controversial Nord Stream 2 project, which makes this partnership unsettling.

“They can just delay the project indefinitely to serve their own interests with Russia,” Ponomarev said.

If completed, Nord Stream 2 would allow Russia to bypass Ukraine when transporting an annual 110 billion cubic meters to European countries through Germany, depriving Ukraine of at least $1.5 billion in transit fees per year.

Russia and Ukraine are currently under a five-year, $7.2-billion agreement that guarantees a fixed amount of gas transmission through Ukraine each year.

From 2021 through 2024, the annual guaranteed amount is 40 billion cubic meters — out of 200 million cubic meters exported by Russia each year.

No-go zone

There’s another factor working against the Ukraine-Romania cooperation in the Black Sea — the Kremlin. Russia’s substantial presence in the Black Sea makes it difficult for Ukraine to develop offshore gas deposits with major partners.

“Russia is doing everything to prevent Ukraine from developing in the region,” Ponomarev said.

He cited the example of British-Dutch company Shell, another Nord Stream 2 shareholder, which dropped a potential partnership with Ukraine when Russia attacked the country in 2014.

Under the United Nations Convention on the Law of the Sea, exclusive economic zones (EEZ) extend 370 kilometers from a sovereign country’s coastline.

As of March 2014, ChornomorNaftogaz gas estimated the Crimean maritime zone to have gas resources worth trillions of dollars.

Russia’s illegal annexation of Crimea meant Ukraine not only lost substantial offshore reserves but also control over Naftogaz subsidiaries operating in the region, along with billions of dollars in equipment.

In 2014, Russia’s military forcibly seized Naftogaz’s daughter company ChornomorNaftogaz’s drilling rigs, its fleet and headquarters in Sevastopol.

It was the “biggest loss of Ukraine in Crimea,” accounting for 80% of its Black Sea oil and gas deposits, according to Anton Korynevych, permanent representative of the President of Ukraine in the Autonomous Republic of Crimea.

Naftogaz filed a lawsuit against Russia in The Hague in 2017, demanding $5 billion in damages from the loss of assets. The lawsuit hasn’t shown any results.

In June 2020, Russian lawmaker Mikhail Sheremet publicly stated that Russia will stop any attempts to extract hydrocarbons on the Black Sea shelf off the coast of Crimea.

“Any attempt to interfere will be viewed by our side as an act of aggression against Russia,” he said.

A crowded sea

Russia’s annexation of Crimea has complicated relations with all its Black Sea neighbors.

The peninsula’s EEZ overlaps with what remains of Ukraine’s, as well as with those of Romania and Turkey, which is also eyeing further exploration in the Black Sea.

Since Turkey didn’t sign the United Nations Convention on the Law of the Sea, it isn’t required to respect any EEZ commitments.

What matters is who drills first.

The country made international headlines in 2020 when it said reserves at its offshore Tuna-1 exploration zone may have 405 billion cubic meters of gas.

The find was Turkey’s largest-ever natural gas discovery, and Ankara hailed it as a “miracle,” while claiming that Turkey could become a net exporter of natural gas.

The gas deposit is located some 150 kilometers off Turkey’s Black Sea coastlin and is at the perimeter of Bulgaria’s and Romania’s maritime borders.

Bulgaria’s total reserves are unknown, but just one of its unexplored fields is thought to contain 100 billion cubic meters of gas, enough to cover the country’s annual demand for more than 30 years.

These factors raise the stakes in the region, attracting investors everywhere, except Ukraine — the country that is still “not ready for foreign investment,” Ponomarev said.